The USA's debt ceiling will be reactivated at local time on January 2 (Thursday), presenting another challenge that has caused disputes for Republican members of Congress in 2025. Trump has asked Republican lawmakers to address the debt ceiling issue before his swearing-in on January 20, but since the USA could face the risk of default for the first time in several months, lawmakers have some time.

Previously, the debt ceiling was suspended until January 1, 2025. After the debt ceiling is reinstated, the amount will be reset to the total US debt on the previous day (January 1). However, US Treasury Secretary Yellen indicated that due to plans to redeem certain securities, the debt level on Thursday is expected to decrease by 54 billion USD compared to the previous day. Because of this technical coincidence, the USA will not actually reach the debt limit that day, allowing the Treasury to continue borrowing to fully and timely pay federal government bills.

Subsequently, the USA is expected to reach the reset debt limit between January 14 and January 23. In a letter to Congress, Yellen wrote that by then, the Treasury will need to begin taking so-called extraordinary measures to prevent default. Earlier this week, the USA's total debt was slightly below 36.2 trillion USD, but higher than the 31.4 trillion USD in June 2023, when the bipartisan Fiscal Responsibility Act temporarily suspended the debt ceiling.

If the limit is reached after Trump's inauguration on January 20, Yellen or the acting treasury secretary at the time will notify Congress and outline how the Treasury will proceed. The letter may also provide lawmakers with an estimate of how long they have before the situation could become critical, known as the X date. According to preliminary analysis from the Bipartisan Policy Center, the Treasury's cash and extraordinary measures should be able to last at least a few months after the first quarter of 2025.

"Compared to when the 2023 debt ceiling debate began, the federal government will start 2025 with more cash," said Shai Akabas, executive director of the center's economic policy program.

"This buffer, along with extraordinary measures and tax revenue in April, means the debt ceiling will not be the first issue Congress faces in the new year. Every piece of legislation they craft in the coming months provides an opportunity to address the debt limit in a timely manner."

According to the center, how long Congress takes to address the debt ceiling predicament largely depends on federal tax revenues in the spring, the pace of supplementary disaster relief funding, additional federal spending legislation, and economic health.

It is unclear what would happen if the USA actually defaults, as this scenario has never occurred. The Treasury would have to decide which bills to pay, such as social security benefits and federal employees' salaries, depending on its daily revenues. A default could also disrupt the global economy and stock markets, and may lead to increased yields on US bonds, raising borrowing costs.

Despite the Republican Party controlling Capitol Hill this year, its leaders find it challenging to handle the debt ceiling issue, especially if they choose to legislate without Democratic support. Due to the narrow majority advantage in the House, Speaker Johnson cannot afford much 'betrayal,' particularly from conservative members who demand that any measures to increase or suspend the ceiling must be accompanied by spending cuts.

Meanwhile, Trump is pressuring Congressional Republicans. Last month, he called on the party to address the debt ceiling issue in the bill, which led to the undermining of a bipartisan temporary government spending agreement. Ultimately, Congress passed a short-term funding bill without a debt ceiling provision. Trump reiterated his demands last Sunday, posting on Truth Social:

"Democrats must be forced to vote on this perilous issue now, during the Biden administration, rather than waiting until June... They should be held accountable for this potential disaster, not the Republicans!"

Last month, Republican leaders in the House proposed an idea to raise the debt ceiling by $1.5 trillion as part of a mediation package for early 2025. This legislation could include border security and Energy measures, and it would also incorporate $2.5 trillion in mandatory spending cuts aimed at satisfying conservative members who oppose raising the debt ceiling without spending reductions.

The Republicans hope to utilize the mediation process to pass some key agendas, as they only need a simple majority in the Senate to do so, given that the party will have 53 majority seats this year. If they use the reconciliation process, Republicans will not have to negotiate with Democrats who oppose significant cuts to spending.

However, Akabas noted that going this route would violate recent traditions, as debt limits have always been addressed through bipartisan agreements, including during Trump's first term. Akabas also indicated that even if the Republicans raise the debt ceiling by $1.5 trillion, it would not give the party much time. According to his rough estimates, the USA will reach a new ceiling in the second half of this year, with the potential risk of default appearing in the first half of 2026.

Editor/ping